WAITING FOR GODOT
Arshad M. Khan
AT least a dozen or more of the top banks are bankrupt. Yet they are busy declaring record profits.
How is that possible? It’s quite simple. In December 2008, they pushed Congress to put the screws
on the accountants’ rule-making body the Financial Accounting Standards Board (FASB) to change
the mark-to-market rule governing the banks investments in securities. Instead of reality-based
accounting where the securities are valued at their market price, we are now in la-la-land
accounting. The securities remain on the balance sheets of these banks at purchase price, the
losses to be recognized only when they are sold.
Like waiting for Godot, these banks are waiting for their loan bundles which include loans based on
subprime mortgages to rise again in price — an unlikely prospect since many of these mortgages
are in default. The banks will be waiting and waiting and waiting …. . In the meantime, they keep
declaring record profits without increasing lending because these funds are used to shore up
shaky balance sheets.
All of this comes to mind because the President has recently been touting the benefits of the
stimulus package in saving two million jobs. To be fair, the original problem is not his doing. Yet
his response, a sort of patch-work, keep-it-going approach has increased the fragility of the
economy. Keeping bankers and their captive economists as advisors blinkered the course of
action. A clean breast of it by the banks and a FDIC take over would have purged the system. But
that’s a tall order when all the significant legislative committees are lathered in financial industry
funds. So we got little taps on the wrists and a few screams at executive pay, and business is back
as usual while we wait for the other shoe (or perhaps an anvil on the head this time) to drop.
In the eighties after the deregulation of the Savings and Loan industry, many of these S&Ls
invested in riskier high-interest projects and rewarded their senior ranks handsomely — for a time.
Eventually, the law of averages caught up with them and they went bust leaving the taxpayer to
foot the $387 billion bill. There were over a thousand criminal prosecutions then and numerous
convictions and jail terms. This time the subprime frauds have been obvious, the banks and the
rating agencies complicit, the losses in the trillions and not a single prosecution. Not one! Zilch!
Zippo! How times have changed?